Pound Holds Decline as Services Slowdown Signals Darker Outlook

  • Services PMI expands least in four months, undercuts forecast
  • Gilts drop as rate-hike prospects grow even as data underwhelm

Morgan Stanley’s Nell Says Brexit Is Starting to Bite

The pound held a two-day decline against the dollar after data showed Britain’s services sector expanded at the slowest pace in four months in June.

Sterling earlier touched its lowest level in a week versus the U.S. currency as IHS Markit’s Purchasing Managers Index fell to 53.4 last month from 53.8 in May. The reading was below the forecast of 53.5 in a Bloomberg survey of economists and came two days after a measure of manufacturing output signaled a slowdown.

The reduced pace of expansion in the services sector adds to growing evidence that the U.K. economy is feeling the impact of the uncertainty triggered by last year’s Brexit vote. Still, faster inflation is pushing some Bank of England policy makers to step up their hawkish rhetoric, which is weighing on government bonds.

  • GBP/USD little changed at $1.2913, after falling to $1.2894, lowest since June 28. The upper boundary of the thick Ichimoku cloud provides support for second day at 1.2907
  • Despite the data, analysts at Commonwealth Bank of Australia, including Peter Kinsella, forecast a rate increase in November 
    • “The 25-basis-point rate increase will not represent the start of a hiking cycle by the BOE. Rather the removal of the 2016 rate cut,” Kinsella writes in a client note
    • Sterling “will appreciate modestly from current levels; markets have not priced in the rate hike”
  • U.K. gilts led declines among European peers on Wednesday as BOE policy maker Michael Saunders warned that “households should prepare for interest rates to go higher at some point”
  • Yield on 10-year gilts rose 4 bps to 1.29%. The yield touched 1.31% on July 3, the highest since Feb. 16
    • “Our foot is pretty much on the floor with the accelerator,” Saunders told The Guardian in an interview published late on Tuesday
    • While his comments were in line with his previous hawkish stance, he had voted for a rate hike last month, they weighed on gilts as they added to the growing bets of a 25-basis-point increase in rates before year-end

— With assistance by Sejul Gokal

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